A director in a franchise business called us with a problem. Their business was not performing as well as they were promised when they took the franchise on. They had fallen behind on rent and the landlord was applying pressure. They had had enough and wanted to close the business
We told them every franchise arrangement is slightly different, but the same approach usually works. It is best for the franchisee to talk to the franchisor first and let them know they are thinking of closing and find out what they want to do. Ask them if they want to take over the franchise, or are they happy to let it close.
More often than not the franchisor holds a charge of the franchisee’s business and all of its assets, so they end up being a secured creditor in a liquidation proceeding.
If the franchisor wants to take the business over, it’s best that they do that before the liquidation starts. Once everything has settled, the former franchisee should start the liquidation and the liquidator can look at the franchise agreement and decide if the franchisor acted within their rights, or if the company in liquidation has rights that could be enforced.
In this case the franchisor took over the business, but when we examined the franchise agreement and PPSR records the franchisor’s charge it didn’t cover all assets of the company. We found the franchisor should have paid fair value for some valuable assets and managed to recover funds that resulted in a distribution to creditors.
This helped the director personally because not only did we close the company removing the stress, the distribution reduced debts that they potentially would have had to pay under a personal guarantee.